Suncor Energy

SU : TSX : C$42.60
Target: C$50.00

Energy — Senior E&Ps/Integrateds
We believe there were four very important key takeaways from SU’s Q1
release and associated conference call:
1. Operational reliability for SU remains strong. The company reached an
SCO production record of 312 MBbl/d in Q1/14, which included a 21%
increase in sweet production compared to Q1/13. In addition, refinery
utilization has increased from 92% in 2011 to 96% this quarter. This
should help further re-rate shares, in our view.
2. SU is realizing the cash flow uptick from railing Western Canadian light
oil to its Montreal refinery. We believe this led the company to beat
market expectations; and will likely lead to increases in Sell Side
estimates. It also helped to demonstrate the free cash flow potential of
this company (SU generated about $1.4 billion in Q1 alone). Expect
more benefits once Line 9 reversal commences operations.
3. The company disclosed significant uptick to realized prices and
netbacks when selling dilbit blend in PADD III (USGC) as opposed to
PADD II. To that end, SU stated it realized an $8/Bbl net of
transportation uptick by selling in PADD III as opposed to PADD II. This
is a key confirmation of our heavy oil thesis. The best read-through on
this, in our view, is MEG Energy (MEG-T:$40.10|BUY )
4. Further confirmation around the willingness to export Canadian crudes
beyond the U.S. To that end, management stated on SU’s Q1 call that it
will look at opportunities to ship some volumes offshore that make their
way down the Keystone southern leg. As discussed in our April 21st
report “Q2 Global Energy Themes”, we believe a consortium is building
up in Canada to make the country a major exporter of oil beyond the
Bottom line: The first two points are positives for SU; and reasons why we
reiterate our BUY rating and are raising our EPS/CFPS estimates and our
target by $1 to $50. The remaining two points are key to our bullish view on
Canada as we continue to believe they will lead to Canadian crudes being
linked to global prices; and thus resulting in a re-rating of the sector.

Pine Cliff Energy Ltd. BUY

PNE : TSX-V : C$1.42

Target: C$2.25

Pine Cliff Energy Ltd. is a junior oil and gas producer
focused on dry natural gas, with assets in Alberta. Pine
Cliff trades on the TSX Venture under the symbol “PNE”.

All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We are initiating coverage of Pine Cliff Energy with a BUY rating and a
C$2.25 target price. PNE has had a great run over the last year,
increasing its share price by ~60%, but in our view, this is just the
beginning. Driven by accretive acquisitions and a rebounding gas price,
we expect this stock to go materially higher over the coming year, as
reflected in our forecast return of 58%. Our valuation is NAV based and
maps to a 2014E EV/DACF of 14.7x.
Why we believe this stock is set to outperform:
 Gas Leverage to the Extreme. Simply the best way to gain
exposure to rising gas prices, in our view, given a production
base that is 95% dry gas with no hedging in place. As
highlighted in Exhibits 1 and 2, PNE is the most levered
company to natural gas prices in our coverage universe, with a
$1 increase in AECO prices driving an increase to estimated
CFPS of ~40% and an increase to NAV of over 40%. In our view,
if you want to own gas, you want to own Pine Cliff.
 Acquisitions to drive performance. PNE has taken a contrarian
approach by purchasing dry gas while others chase oil and
NGLs. The last two significant acquisitions by the company over
the last year have resulted in share price bumps of 46% and
36%, respectively. PNE currently trades at 9.0x 2014E
EV/DACF, but as we walk through in Exhibit 3, if the company
were to buy $100 million in assets at 5x cash flow, this multiple
would be just 6.8x 2015E estimates. Use a 5$ AECO price and
it’s at just 5.4x.
 Our Call? Give this management team your money. George Fink
is well respected as an excellent steward of capital, and for
good reason. Early investors in Bonterra Energy (BNE: TSX: Not
Covered) have been handsomely rewarded over the last 16
years, with a CAGR of 45% since 1998. In addition to the energy
space, Mr. Fink has also had success in mining, where at
Comaplex Minerals he provided investors with a CAGR of 21%
over a 15 yeear period.
Our C$2.25 target price is based in part on our assumption that the
company will be successful in completing $150 million in acquisitions
over the next year and post transaction its multiple will return to the
natural gas peer group average of 9.0x EV/DACF

Peyto Exploration & Development Corp.

Personal note : my daughters went to college on the money I made tracking Peyto from $ 8 to $30


TSX : C$34.92 
HOLD  Target: C$39.00

 COMPANY DESCRIPTION: Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted

Oil and Gas, Exploration and Production GOING LONGER IN 2014 
Investment recommendation

Peyto announced fourth quarter results which were largely in line given pre- announced production and capital expenditures. Its infrastructure remains highly utilized and requires further expansions this year to accommodate growth; Peyto remains poised to do that given ~100 MMcf/d of capacity expansions planned this year. It has noticeably moved to longer lateral horizontals given licenses to date and we see the potential for a 10% improvement in IRR and capital efficiencies from ERH development. Peyto remains one of the highest quality natural gas producers in the Basin and a go-to name for exposure. We maintain our HOLD recommendation and C$39.00 target; however, we will continue to monitor the share price for any improvement in valuation (all other factor being equal).
Investment highlights Envision little change to 2014 budget despite firmer gas prices. Despite higher natural gas prices, we see a low probability of any meaningful increase to its $600 million budget given lead time and infrastructure planning. Additionally, PEY has hedged ~55% of 2014 production at ~C$3.70/Mcf, so it has a relatively modest upside participation.
Going longer in 2014.  Peyto has noticeably shifted its licensing and 2014 well program to extended reach horizontal (ERH) wells. Its average well length in 2013 increased by 7% or 100 meters YoY; we see the potential for a material increase in 2014. It is still early in terms of results and costs for Peyto-operated ERH wells; however, we believe ERH wells could provide a +10% improvement in capital efficiency and +10% uplift in IRR per well, which are not captured in current forecasts.
Valuation Peyto currently trades at a 1.1x multiple to CNAV, 11.3x EV/DACF multiple, and $83,400/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 8.1x EV/DACF, and $77,000/BO

Bankers Petroleum Ltd

BNK : TSX : C$4.04
Target: C$6.00

Bankers’ operations are focused on developing heavy oil
assets in Albania, which include rights to develop the
Patos-Marinza and Kucova heavy oil fields (both 100%
interest) during the 25-year licence period. Bankers has
an opportunity to unlock immense potential from its 7.7
billion barrels oil-in-place Patos-Marinza field by applying
modern techniques to optimize recovery factors, expand
its resource base, and increase production.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
Bankers Petroleum announced its 2014 budget, projecting capital
expenditures of $313 million and production growth of 10-15% over
2013. The budget reflects a 27% increase over the 2013E program and
is the largest in the company’s history. Approximately 90% of the budget
will be directed toward development work, while the remainder is
earmarked for enhanced recovery initiatives and new ventures like
horizontal wells at Kuçova and 3D seismic on Block F. We have revised
our estimates to reflect updated guidance, resulting in a 2014E NAV of
C$7.05 (from C$7.15). With numerous cost-cutting initiatives planned
for the coming year, we believe 2014E operating funds could surprise to
the upside (although we have not yet incorporated a reduction in
operating costs). With a 12-month target price of C$6.00/share and a
potential return to target of 47%, we reiterate our BUY recommendation.
Investment highlights
 The company has doubled its budget for enhanced recovery
initiatives, which if successful, should generate lower decline rates
and a higher overall recovery factor.
 We expect that operating funds will outpace capital expenditures by
~10% based on a 2014 Brent price of $104/bbl. At $100/bbl, we
forecast a balanced budget.
We use a DCF model to value Bankers. Based on our 2014E estimates
Bankers is trading at a multiple of 0.57x our risked NAV, 2.9x EV/DACF
and $46,840 per flowing barrel. This is significantly below the domestic
junior averages of 0.8x NAV, 5.6x EV/DACF, and $73,200 per flowing
barrel, despite Bankers’ better-than-average netbacks and favourable
debt levels. With a 12-month target of C$6.00 and a potential return of
49%, we reiterate our BUY recommendation.

Canadian Natural Resources Ltd. BUY

CNQ : TSX : C$32.61
Target: C$42.00

Canadian Natural is one of the largest independent crude oil and natural gas producers in the world with a diversified and balanced asset base of natural gas, heavy oil, oil sands and light oil.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
We are raising our target price by $3 to $42  on the heels of its Q3 release due to the following:
We believe the large dividend raise demonstrates three things: a) management’s confidence that the Primrose issue is just mechanical; b) where the company is in the spending cycle on the Horizon expansion – i.e., the company sees a path to being in harvest mode and thus ever increasing free cash flow (Figure 1); and c) the benefit of long life oil sands projects.
The company is now changing its tune with respect to acquisitions. In the past management used to highlight how free cash flow would be used to make acquisitions, which would in turn create an overhang on the stock. Yesterday, however, when asked, management stated it has no need to do any acquisitions given there are no gaps in the asset base, thus giving investors greater hope of further dividend increases.
We continue to believe the current WCS differential blow out is temporary and much different than this time last year. While differentials are about as wide as they were a year ago, the difference this time is that there is a clear line of site on infrastructure improvements in less than a year’s time owing to increased coker, pipeline, and rail capacity. As such, CNQ will be the go-to stock given roughly 40% of its production is heavy oil and it lacks downstream operations, which would act as a partial offset. Additionally, it is essentially a household name for non-Canadian investors (the incremental buyer) on this theme given its market cap and liquidity.
Cheapest in the group. At 4.8x 2014E DACF, CNQ is the cheapest among the Senior E&P/Integrateds in our coverage universe, which on average are at 6.1x.

Peyto Exploration & Development Corp.

Simply a great company year after year.

PEY : TSX : C$30.82
Target: C$32.00

Peyto Exploration is a low-cost gas-weighted dividend paying intermediate E&P focused on horizontal drilling in the Deep Basin of Alberta, Canada with highly contiguous land and multi-zone gas potential.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
Peyto released third quarter results which were generally neutral as Q3/13 volumes and capital spending were pre-released. It has eclipsed its previous exit rate guidance ahead of schedule and increased its exit target this year to 71,000 boe/d; however, in doing so it has also increased its 2013 capital spending by ~$65 million. Using the midpoint of its initial 2014 capital budget provides YoY growth (Q4/14 over Q4/13) of ~17% on our forecasts. The higher capital spending profile maintains D/CF at year-end 2014 below 2.0x on our estimates and 74% utilized on its bank facility. We maintain our HOLD rating and C$32.00 target price based on 1.2x NAV and 11.1x 2014E EV/DACF.
Investment highlights
Surpasses exit rate guidance in November as expected. It expects to grow production from 70,000 boe/d currently (up from the Q3 average of 56,300 boe/d) to 71,000 boe/d by year-end on higher 2013 capital spending of $565 million (up $65 million). Despite higher spending, its implied cost of adding production in 2013 is ~$17,000/boepd.
Another aggressive year in 2014 spending ~$600 million. It forecasts adding production in 2014 at a cost of $18,000/boepd in line with our prior forecasts, resulting in Q4 average growth on our estimates of 17% YoY. Its D/CF reduces to 1.9x (from 2.2x) next year on our forecasts.
No Brazeau well update but spending in 2014 implies positive results. Results from its new wells are still not public; however, its intention to expand processing capacity by 20 MMcf/d implies positive results.
Peyto currently trades at a 1.2x multiple to CNAV, a10.7x EV/DACF multiple, and $77,000/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 7.4x EV/DACF, and $71,800/BOEPD.

Pengrowth Energy Corporation

PGF : TSX : C$6.42
Target: C$7.50

Pengrowth Energy Corporation is an intermediate, dividend paying E&P focused in the Western Canadian Sedimentary Basin. Pengrowth is listed on the TSX & NYSE under the symbols “PGF” and “PGH” respectively.
All amounts in C$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
Pengrowth beat production expectations by ~2% resulting in a ~$0.02/share beat on CF in Q3. The company remains focused on transforming into a sustainable thermal oil developer over the medium to long term and presents investors with an extremely attractive 7.5% dividend yield. Near term it remains acutely focused on the execution of its $590 million commercial development project at Lindbergh (project remains on time and budget), and its conventional program in the Cardium where results have shown a material improvement YoY. We have maintained our BUY rating and C$7.50 target price based on 0.9x NAV and an 8.1x EV/DACF multiple.
Investment highlights
Q3 volume and cash flow beat. Average production of 83,275 boe/d beat CG/consensus expectations by ~2%. CFPS of $0.31 beat CG/consensus of $0.28/$0.29 given higher volumes. Full year guidance of 82,000 to 84,000 boe/d was maintained; we are at the high end with 83,800 boe/d.
Cardium results continue to improve. Average PGF well results at both Garrington and Lochend have shown material improvement YoY (20% to 60% uplift). Additionally, at Lochend, drilling days in 2013 are down on average by 4.2 days, a function of both increased pad drilling efforts but also improved operational focus and productivity gains.
Lindberg is progressing. PGF began drilling the 23 SAGD well pairs in September, in line with expectations and remains on time and budget for first steam in Q4/14 and production in early 2015 from Phase 1.
Pengrowth currently trades at a 0.8x multiple to CNAV, a 7.4x EV/DACF multiple, and $73,000/BOEPD based on our 2013 estimates, versus peer group averages of 0.8x CNAV, 7.3x EV/DACF, and $71,800/BOEPD.

TORC Oil & Gas Ltd.


TSX : C$8.54

Target: C$13.75

TORC is a dividend paying junior oil & gas company with assets in Alberta and Saskatchewan. TOG is listed on the
TSX under the symbol “TOG”

All amounts in C$ unless otherwise noted.

Our target price of C$13.75 is NAV based and implies a 2014E EV/DACF of 9.2 x

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We are reiterating our BUY thesis on TOG, as we believe the stock is
well positioned for a strong run through Q4. In addition to a compelling
valuation, solid balance sheet, and motivated and proven management
team, TOG has several potential catalysts on the horizon that could
boost the stock as we head into year end. As a result, we believe the
current share price represents an excellent entry point into the stock,
and we are adding TORC to our CG Focus List.
Catalysts on the Horizon
 Catalysts Expected: Time to Get In. TOG has several potential catalysts on the horizon over the next three months, which we believe makes now an excellent entry point into the stock. These include:
 Guidance Increase with Q3? Our current model incorporates TOG’s 2013 exit rate guidance of 9,500 boe/d, with a 5% increase in production through 2014.
Given the company’s Q2 production level of ~4,300 boe/d and the asset acquisition of 5,700 boe/d, we believe TOG may be in position to raise its guidance, particularly given an active drilling program through the back half of the year. By our estimates, TOG may be in position to increase exit rate guidance by +5%.
 Upward revision in oil price decks. With the continued strength in the oil price, we believe many investment dealers will be revising their 2014 oil price decks higher in Q4. Given TOG is 85% weighted to oil, its valuation and payout ratios should look even more attractive in industry comp tables in the coming weeks


Enbridge Inc. Update BUy Target Price $50

ENB : TSX : C$42.44
Target: C$50.00

Enbridge operates the world’s longest crude oil and liquids pipeline system. The company owns and operates Enbridge Pipelines Inc., a variety of affiliated pipelines in Canada, and has a 23% interest in Enbridge Energy Partners LP and a 67.8% interest in Enbridge Income Fund.
All amounts in C$ unless otherwise noted.

Infrastructure — Pipelines
Investment recommendation
Enbridge hosted its 15th annual Enbridge Day, once again highlighting the company’s dedication to the safety and integrity of operations, the execution of its committed growth projects, and delivering on incremental growth initiatives to enable the earnings, cash flow, and dividend growth profile to extend into the second half of the decade. In 2013, the company expects to place into service about $5 billion of projects ($4 billion already placed into service), with another $9 billion slated for completion in 2014. Many of the projects will increase liquids pipeline capacity and generate increased volumes on the Canadian Mainline (among other pipelines) where earnings growth is fueled by volume throughput under the Competitive Tolling Settlement. The company now has ~$26 billion of commercially secured growth projects which are expected to be placed into service over the 2013 to 2017 period. In addition to the commercially secured portfolio of projects, Enbridge has $10 billion of risked opportunities that are unsecured, which are included in the longer term financing plan and earnings outlook (beyond 2017).
With the secured project portfolio currently before them, management expects the company’s EPS growth rate to average 10-12% and has extended the growth horizon by one year through 2017 (previously through 2016) with dividend growth commensurate with EPS growth and potentially higher beyond 2017. Note that about $14.3 billion of the projects have an upward sloping return profile, implying higher returns in later years. As a result, management is comfortable that the potential $10 billion of unsecured risked projects and the tilted returns from more than half of its secured projects will provide support to extend the company’s growth profile beyond 2017 at the 10-12% rate. Enbridge has a very visible and attractive growth outlook with a management team that has proven itself by meeting targeted in-service dates at or below budget. We believe the strong EPS, CFPS, and dividend growth profile combined with the stable and proven business model is compelling, particularly in a rising interest rate environment. We maintain our BUY rating and 12-month C$50.00 target price.

Devon Energy

DVN : NYSE : US$59.02
Target: US$75.00

Devon Energy is an oil and gas E&P company with assets in the U.S. and Canada. The company also has a significant midstream operation. It is headquartered in Oklahoma City, OK.
All amounts in US$ unless otherwise noted.


Investment recommendation

We reiterate our BUY rating on DVN in light of the recent industry call that Canadian heavy oil producers can benefit from improved oil differentials over the next few quarters. Moreover, that improvement would not hinge on Keystone XL’s approval. For a detailed look into Canadian takeaway developments, please refer to The Sandbox: Hey Barry, Keystone XL Does Not Matter.
Investment highlights
 Leveraged to improving Canadian differentials: Every $5/Bbl improvement in the WCS-WTI differential adds $150M to DVN’s annualized EBITDA or a 2% increase to our 2014 estimate of $7.4B. We currently model DVN using a 30% WCS-WTI differential.
 Canadian oil accounts for 13% of total volumes: 93 MBopd in Q2/13 includes both SAGD and other oil production. DVN’s two Jackfish SAGD projects produced 53 MBopd last quarter accounting for 8% of total hydrocarbon volumes.
 SAGD volumes should grow substantially in 2014/15: Production should pick up in ’14 and accelerate in ’15 with the ramp of Jackfish 3 in Q3/14 that will increase capacity to 105 MBopd.
 Pike projects can add further capacity: The Pike projects could add an incremental 175 MBopd of capacity in the coming decade. The first development phase of Pike is expected to gain regulatory approval by year’s end.
 Among the best SAGD assets in Canada: DVN’s Jackfish facilities are 25% more efficient than average when compared on a steam-oil ratio basis. Production per well is nearly 3x the industry average.
We value DVN on NAV and EV/EBITDA. By applying a 20% discount to our $110/share NAV and averaging that with a 4.0x multiple of 2014E EBITDA of $7.4B, we arrive at our $75 target


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